Social Security — A pillar of retirement income

Last week my friends down the hall at the Center for Labor Research and Education released a new book titled Meeting California’s Retirement Security Challenge edited by Nari Rhee. The book (available free for download) addresses many issues pertaining to retirement, and my part reports the lay of the land for current retirees in the United States and specifically for California. This figure is from my contribution in the book’s second chapter and it illustrates current sources of income for retirees in California.

The top pie chart represents income sources for low income retirees in California, defined as those with incomes in the bottom 25 percent. These retirees rely almost solely on the government-sponsored programs of Social Security and Supplement Security (disability). These two slices of retiree income make up, on average, 90 percent of this group’s income.

Even middle income retirees—the second chart—rely heavily on the pillar that is Social Security. The share of income coming from Social Security is 70 percent for this group. Retirement funds (defined benefit and/or defined contribution) account for just 16 percent of income.

It is only those in the top 25 percent that are supported by a diverse portfolio: 37 percent retirement funds, 23 percent from Social Security, 22 percent from ‘other’ funds, and considerable dividend and rental income.

The first two charts highlight that the metaphor of the ‘three legged stool’ of retiree income (income from pensions, Social Security and savings) is obsolete. It simply does not exist for most retirees in California or the United States.

Social Security has arguably been the most successful program administered by the government. It has been working for over 75 years to help protect retired workers from poverty as well as help the disabled. Poverty among the elderly was over 50 percent prior to Social Security, but today the age cohort with the lowest rate of poverty is people 65 years and older—only 9 percent of people older than 65 live in poverty, compared to 15.1 percent overall.

The debate over privatizing Social Security, or the constant rhetoric of its demise, is always in the air, but actual retirees and their finances are often lost in the discussion. In truth, says the Congressional Budget Office, Social Security is on sound footing until 2038.

A more immediate issue regarding Social Security is a plan to cut benefits by either changing the benefit formula and/or increasing the retirement age which would be detrimental to a large number of retirees. However, small tweaks to Social Security could help secure it well into the future. For example, the Center for Economic and Policy Research analyzed a proposed Social Security tax on earnings of more than $250,000 (earnings between $106,800 and $250,000 would be exempt) that could potentially add trillions of dollars to the fund—and only affect a little more than 1 percent of workers.

My review shows that doing just that—shoring up and strengthening Social Security—should be one of our top priorities.

If the people who have invested into Social Security want to see a return, entitlement reform will have to happen. The federal health law, which will expand coverage to 30 million currently uninsured Americans, will have little effect on the nation’s rising health spending in the next decade. Health spending will grow by an average of 5.8% a year through 2020. Currently Social Security and Medicare use 8.5% of nonentitle­ment revenues (federal revenues dedicated to all other programs besides the two). By 2020, the deficits will grow to almost 25%. This means that within 9 years, in order to pay projected benefits to retirees and the disabled, the federal government will have to stop doing about one out of every five things it does today. The federal and state governments are projected to spend $466 billion on Medicaid this year, with costs rising about 8% a year.

I think that part of the political problem with Social Security is that a program that started in the depression as a way to get money into circulation quickly and to ameliorate severe poverty among the elderly has quietly morphed into a national retirement pension plan without anyone (particularly politicians) admitting that the change had taken place (sort of like the California Legislature’s refusal to use the word “tuition” long after it had become a reality.)

Facing the fact that Soc. Sec. is a national pension plan — using the word — and that it must be administered as a pension plan might help in working out a sensible reform plan. It would probably also add to honest assessment and debate if SSI (except as it relates to the actually retired) were broken out as a separate program dedicated to government support for the disabled.

3 Cheers for Social Security, this is for everyone I grew up and growing old with! All are hard workers, raised good families, took care of their folks, watched out for their neighbors,volunteered at school, boys & girl scouts and contributed at our place of worship.

God forgive those that call Social Security an entitlement, as if we all haven’t earned every single cent, in more ways then one.